Abstract
<jats:p>This paper examines the interrelation between functional transformation and demographic change in small towns in Serbia, focusing on temporal and spatial disparities and uneven development trajectories. Small towns are identified according to Eurostat methodology and its adaptation for Serbia (Degree of urbanisation (DEGURBA) level 2). The analysis adopts a longitudinal perspective spanning four decades, based on the Census data for three selected years: 1981, the peak of industrial development; 2002, marking industrial collapse and transition; and 2022, which illustrates the current state. Functional transformation is explored through thenar diagrams, which capture employment shifts across the main economy’s sectors, harmonized and categorized in line with the official Classification of Activities. Results revealed a significant correlation between functional shifts and demographic trends, as well as the fact that functional transformation does not lead to uniform demographic outcomes across the small towns, but rather produces divergent development trajectories. Negative functional shifts associated with severe demographic decline are common for the small towns with a strong orientation toward the industry sector. Also, some of the small towns that faced a significant shift to the service economy experienced a pronounced demographic decline. Conversely, some towns demonstrate positive adjustment by restructuring their economies towards specific service activities and redefining their roles in the local development and settlements network. The findings challenge the assumption that tertiarization represents a sustainable development path for small towns. By linking long-term demographic change with functional restructuring, the paper contributes to a deeper understanding of small-town development in post-socialist contexts.</jats:p>